Issue
Are payments made to the taxpayer, an Australian resident, under section 60 of the Accident Compensation Act 1982 ( New Zealand ) included in assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The payments made to the taxpayer, an Australian resident, under section 60 of the Accident Compensation Act are included in the assessable income of the taxpayer under subsection 6-5(2) of the ITAA 1997.
Facts
While employed in New Zealand, the taxpayer sustained a workplace injury.
Subsequent to this, the taxpayer became an Australian resident.
As a consequence of sustaining the workplace injury, the taxpayer received workers' compensation payments weekly from the Accident Compensation Corporation (ACC) in New Zealand under section 60 of the Accident Compensation Act.
The Accident Compensation Act has been subsequently repealed and replaced in New Zealand by the Accident Rehabilitation and Compensation Insurance Act 1992 (effective 1.7.1992), then the Accident Insurance Act 1998 (effective 1.7.1999) and then the Injury Prevention, Rehabilitation and Compensation Act 2001 (effective 1.4.2002).
Reasons for Decision
Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted ( Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 10 ATD 82; (1952) 5 AITR 443). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts ( Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; 89 ATC 5142; (1989) 20 ATR 1516, Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411, and Case Y47 91 ATC 433; Case 7328 (1991) 22 ATR 3422).
In determining liability to tax on foreign sourced income received by an Australian resident taxpayer, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (the Agreements Act).
Schedule 4 to the Agreements Act contains the tax treaty between Australia and New Zealand (the New Zealand Convention). The New Zealand Convention operates to avoid the double taxation of income received by Australian and New Zealand residents.
Subsection 4(1) of the Agreements Act provides that the Agreements Act incorporates the ITAA 1997 and those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except for some limited situations that are not relevant in the present case).
Article 18 of the New Zealand Convention provides that pensions (including government pensions) and other similar periodic remuneration sourced in New Zealand and paid to a resident of Australia are taxable only in Australia.
The term 'pension' is not defined in the New Zealand Convention.
Article 3(3) of the New Zealand Convention provides that any term not defined in the Convention shall, unless the context otherwise requires, have the meaning which it has at that time under the law of that State relating to the taxes to which the Convention applies.
In relation to the meaning of the term 'pension', Taxation Determination TD 93/151, which deals with how periodic workers' compensation payments made by Comcare are characterised for the purposes of Australia's tax treaties, states at paragraph 1: A pension is defined in the Macquarie Dictionary as '1. A fixed periodical payment made in consideration of past services, injury or loss sustained, merit, poverty etc. 2. An allowance or annuity.' The meaning of the term 'pension' was considered by Hill J. in the Federal Court in Tubemakers of Australia Ltd v FCT (1993) 25 ATR 183. His Honour concluded that the essential characteristic of a pension is that there be periodical payments.
Subsection 60(1) of the New Zealand Accident Compensation Act provides that an earner who suffers personal injury by accident and does not completely recover from incapacity due to the accident will be paid earnings related compensation. Subsection 60(1) also stipulates how the amount of the compensation is calculated based on the assessment made by the ACC.
The payments fall within the Macquarie dictionary meaning of 'pension' in that they are a fixed periodical payments made in consideration of injury or loss sustained. Furthermore, the payments have the essential characteristic of a pension as per Hill J in the Tubemakers Case in that they are periodical payments made weekly.
The compensation payments made to the taxpayer from the New Zealand ACC are therefore a pension for the purposes of the New Zealand Convention.
As the workers' compensation payments are related to earnings, they are ordinary income and are included in the assessable income of the taxpayer under subsection 6-5(2) of the ITAA 1997.